Inflation Reduction Act May Boost Allure of Infrastructure ETFs

September 06, 2022

Born from the ashes of President Biden’s fizzled Build Back Better plan, the Inflation Reduction Act passed in August and marked a triumph for the administration.  

It may also signal opportunities to invest in energy infrastructure ETFs. 

As part of getting the bill passed, U.S. Sen. Joe Manchin (D-WV) negotiated a range of energy reforms related to streamlining environmental permitting. The Biden administration vowed to get a vote on the reforms by the end of the year, possibly as soon as September.  

The efforts would result in a review and prioritization of 25 energy infrastructure projects of “strategic national importance” according to a brief by law firm Kirkland & Ellis. The projects involve the development of “critical” minerals as well as boosting nuclear, hydrogen and fossil fuels and carbon mitigation. 

Energy infrastructure, along with transportation projects that were such a big focus of the initial Build Back Better bill, are certainly on investors’ radars. Furthermore, the real assets represented by infrastructure stocks such as pipelines, roads and renewable energy plants, also make the category appealing at a time when many are in fear of recession.  

Finding an Infrastructure ETF 

There are quite a few infrastructure ETFs listed on U.S. markets, but only four of them are U.S. focused rather than global, and only two of those have significant assets. The iShares U.S. Infrastructure ETF (IFRA) has $1.6 billion in assets under management, while the Global X U.S. Infrastructure Development ETF (PAVE) has $3.8 billion. IFRA’s expense ratio is 17 basis points less than the 0.47% charged by PAVE.  

IFRA is the broader of the two funds, with 159 holdings as opposed to 100 for PAVE. While they have 48 holdings in common, there is no overlap between their top 10 stocks. Looking at sector weightings, IFRA might have an edge considering its outsized allocation to utilities companies of more than 42%. Meanwhile, PAVE has an allocation to that category of less than 5%.  

IFRA also has exposure to SunPower Inc., one of the largest solar energy companies in the U.S., as well as firms like Duke Energy Corp. and Constellation Energy Corp. SunPower has significant exposure to solar and nuclear energy, while Constellation is one of the largest nuclear power operators in the country. The Inflation Reduction Act included funds to boost both solar and nuclear energy use.  

IFRA has also outperformed PAVE this past year, gaining 2.2% while PAVE slipped 5.4%. IFRA has lost 3.4% year to date, while PAVE slumped nearly 11%. However, over the three-year period annualized, PAVE was ahead of IFRA by more than 5 percentage points with a return of 19.11%, according to Morningstar Data. 

The iShares fund is broader in scope, and with its strong weighting in utilities, it may be more likely than PAVE to benefit from the upcoming legislation negotiated by Manchin. While its exposure to alternative energy pure plays is limited, it does have some solar power and nuclear exposure, both of which are set to benefit from the IRA itself.  

Investors seem to be betting on IFRA. It’s pulled in more than $880 million in flows year to date, while PAVE has hemorrhaged nearly $1.2 billion. 

 

Contact Heather Bell at [email protected] 

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